What should you do now?

Your answer is correct because slowing down to walking pace and remaining ready to brake are essential safety measures when approaching pedestrians and cyclists in this situation.

In Germany, when you encounter a cyclist on a rural or village road who is riding close to the edge and pedestrians nearby, you must reduce your speed to walking pace to ensure their safety. This allows you enough time to react to any sudden movements, such as a pedestrian stepping onto the road or the cyclist changing direction.

Remaining ready to brake is also crucial because unexpected hazards may appear, such as children or adults crossing or the cyclist losing balance.

You should not overtake the cyclist here because the road is narrow, and it's unsafe to pass with pedestrians present. Overtaking could cause danger to both the cyclist and pedestrians.

This approach aligns with the German traffic rule that prioritizes the safety of vulnerable road users by slowing down and being prepared to stop when passing cyclists or pedestrians, especially in village or rural areas where roads can be narrow and visibility limited.